Larry Fink and the Man in the Mirror avatar Posted by Jeevan Sivasubramaniam - 27 February, 2018
Larry Fink, the CEO of the world's largest investment company, BlackRock, recently wrote a letter to the CEOs of several of the world's largest publicly traded companies. In it, he decreed that their companies should serve a social purpose and demonstrate long-term benefits—and threatened nebulous consequences for those who fail to get in line.
Why does this matter?
BlackRock manages more than $6 trillion in investments. Its portfolio reads like the Fortune 500 roster. When Larry Fink speaks, CEOs listen.
Andrew Sorkin of The New York Times wrote that the letter was “likely to cause a firestorm in the corner offices of companies everywhere.” Elsewhere, especially in progressive circles, the announcement was met with a collective “meh.” In Forbes, B-Lab founder Jay Coen Gilbert pointed out that many companies already maintain a dual focus on profitability and social/long-term growth using the Benefit Corporation governance structure.
Given his stature, the fact that Fink raised the issue at all is noteworthy. However, Fink seems to be unaware of his complicity in the very economic culture he is taking to task. Without action to back it up, he is as culpable as many of the companies he challenges.
Short-term thinking still drives the market.
In his letter, Fink hammered on about the need for a long-term model that looks at social benefit and sustainable long-term growth, but as the head of an investment institution, he himself is responsible for a lot of the short-term thinking that dictates the marketplace.
Company performance and profitability remain measured on a quarterly basis. Every three months, these corporations scramble to make as much money as possible so that their share prices remain competitive enough to yield the best returns for investors. The moment the share price tanks, investors take their money elsewhere or pressure the organization to get a new CEO. The rules are stacked against companies that are focused on the long-term.
BlackRock exists because clients and entities look to Fink and his company to make them money every quarter, not over a decade. Unless Fink can convince his investors not to rely on quarterly profits to judge performance, he cannot ask the same of CEOs.
"Social benefit" is not well defined.
You know that old saying about how you don't sh*t where you eat? Translated into corporate-speak, it means you do good wherever it doesn't interfere with your profits.
Take a look at these three companies that are part of BlackRock's multibillion-dollar portfolio—all tout socially responsible practices and credentials:
- Andes Petroleum (boast of their social responsibility here)
- Frontera (very proud of themselves here)
- GeoPark (touting their culture here)
All three companies are also complicit in Amazon rainforest destruction. Do these companies do good in the world by taking care of their employees, contributing to education, and supporting local economies? Sure. Do they do some serious damage by depleting rainforests, upsetting ecological balances and environments, and ultimately contributing to future devastation? Yep, that too. So how do you measure the good versus the bad?
Lots of corporations already have robust social responsibility programs and claim to contribute to social good. But they're not undoing the social damage their business models are built on.
Take Coca-Cola, for instance. As evident in their 2016 Sustainability report, summarized in this handy infographic, Coca-Cola invests heavily in corporate social responsibility. Ranging from women's economic empowerment, workplace and human rights, environmental and sustainability issues, and philanthropic donations totaling over 100 million, it looks like they're doing plenty to contribute to social good, right? Isn't this what Fink meant when he wrote that “Society is demanding that companies, both public and private, serve a social purpose?"
As a purveyor of sugary, chemical-laced soda, Coca-Cola has been a massive contributor to obesity epidemics worldwide. In the United States alone, the health statistics and associated medical costs are staggering. It may sound obvious, but to quote Bartow J. Elmore, author of Citizen Coke: The Making of Coca-Cola Capitalism, "Coke does not make more money by selling less Coke." In other words, if Coca-Cola decided to retire Coca-Cola because the product actively detracts from social good, they would go under. So companies like Coca-Cola focus their social responsibility and sustainability efforts elsewhere, while their own negative social impact remains core to their profitability and, by default, their appeal to investors. How does Fink address this tension between responsibility and exploitation?
Who's the referee?
In his letter, Fink stressed that governments are failing to step up and meet pressing challenges of the future—challenges from aging infrastructure, looming automation, to boomers reaching retirement and putting pressure on the healthcare system. With the public sector more or less in crisis, "society increasingly is turning to the private sector and asking that companies respond."
Many company leaders already have, at least to a degree. As the Harvard Business Review points out, "as political partisanship and discourse grow ever more extreme, and the gridlock in Washington, D.C., shows no sign of easing," CEO activism is on the rise. And while CEOs have long played an active role in politics, they have only recently gotten vocal. We are now seeing prominent business leaders speak out about a range of social issues—with opinions that fall on both sides of the aisle. Apple CEO Tim Cook has taken up the fight for immigration rights. Patagonia CEO Rose Marcario fighting the federal government over its decision to reduce the size of two federally protected land monuments. Merck CEO Kenneth Frazier resigned from the American Manufacturing Council in protest of the president's comments about the racially charged 2017 Charlottesville protests. The list goes on.
And all this talking may be a good step. But when the government fails to protect the common good, can and should we expect private industry to stand up for the interests of the people? A government is for the benefit of country and people, a corporation is for the benefit of profitability and income generation—who should be more accountable?
Better rules, better players
At the $6 trillion level, Larry Fink has demanded better sportsmanship of corporate players. He has taken a big first step just by making a statement. Now comes the hard part: actually changing the rules of the game. Without concrete action from Fink and others of his stature, companies will still feel pressure to prioritize short-term profitability and rapid resource exploitation over, as he puts it, "long-term value creation." So just as Fink has demanded corporations do their bit to be responsible citizens, it's only fair that corporations and others ask Fink what he plans to do to make this happen.